When President Obama signed H.R. 1586 -- the Education Jobs and Medicaid Assistance Act -- last Tuesday, sending $26 billion in aid to the states, Democrats called it an economic stimulus plan necessary to save jobs. Republicans said it allows states to postpone making tough decisions to balance their budgets. The truth? It does both.

The problem is not that state leaders haven't made tough choices. It's that they haven't yet made the toughest choices needed to manage our increasingly bleak fiscal outlook.

Oregon's recent experience shows the difficulty. Earlier this year, voters approved a $727 million tax increase that was expected to balance the state's budget. Although the pain was limited to corporations and higher earners, it was an extraordinary step: Not since the 1930s had Oregon voters approved an income tax increase.

But by May, a new shortfall of $577 million had materialized. Gov. Ted Kulongoski responded by ordering across-the-board budget cuts of 9%, which included a once unthinkable $240 million cut to K-12 education.

Oregon and most other states have hardly been ignoring their fiscal problems. Combined, they increased taxes by a record $24 billion to balance their budgets last year.

This year, they've made deep cuts. Arizona, for instance, eliminated state funding for full-day kindergarten and closed state parks. Students at state universities in California, Florida and New York are seeing double-digit tuition boosts. More of these cuts run the risk of hurting vulnerable populations, threatening states' long-term fiscal health, and undermining the fragile economic recovery. By providing more aid, Congress concluded that on balance the short-term funding would do more good than harm.

But now that they've been given some breathing room by the new federal funds, every state facing chronic structural deficits -- that is, projected expenditures consistently outstripping projected revenues -- should take seriously the idea of rethinking government.

First, they need to make smarter decisions when deciding which programs to cut and which ones to invest in. Across-the-board budget cuts are not the best way to reduce spending. State leaders must do a far better job of using data to understand what works -- and put an end to what doesn't.

They can begin by looking at what policies have saved money and produced results elsewhere. For example, Texas saved more than half a billion dollars over two years by steering funding away from the construction of new prisons and toward community-based supervision. The prison population has remained flat, while the overall Texas crime rate has fallen, tracking the decline in the crime rate nationally.

Second, states need to operate more effectively and efficiently. Whether by consolidating services or improving their procurement practices, they need to manage to the bottom line. State purchasing totals $200 billion a year for everything from building roads to buying desks and computers. Conservative estimates by Pew suggest they could cumulatively slice 5% to 10% from that figure.

Some states already have begun realizing these savings. In 2008, as the economy took a nose dive, Florida saved $420 million by renegotiating contracts with suppliers eager to keep the business. Minnesota has leveraged the buying power of state and local agencies to drive better bargains. This has resulted in actual and projected savings of $246 million since December 2005, according to data from the state.

Finally, states need to re-examine how they recruit and retain their work force. Workers today don't stay with the same employer for decades as they did in the past, and the private sector has fundamentally changed its approach to compensation over the past 20 years. Yet most state governments have not changed, and they are not well positioned to compete with business for an increasingly mobile work force.

Most states also face enormous unfunded liabilities for promised retirement benefits for current workers and retirees. A growing number of states have taken initial steps to curb these costs, increasing employee contributions and raising the retirement age. But a fundamental rethinking of the public work force may be needed.

There are no quick fixes in any of these areas. Solutions will require good data, rigorous analysis, bipartisan cooperation, public engagement and -- most importantly -- a willingness among state leaders to make tough decisions. This fall, 37 governorships and 6,000 legislative seats are up for grabs, and come January a new crop of leaders will have a fresh opportunity to step up. Let's hope they're ready.

Ms. Urahn is the managing director of the Pew Center on the States, a division of The Pew Charitable Trusts.

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